What Will You Be Doing if the Market Crashes?

Lender · United States · Member since 2020 · 1k+ posts · 499 votes

Obviously only the stock market is currently being effected with the coronavirus, but lets assume in the near future the real estate market starts to feel the impact or we experience another 2008. I'm curious to hear the game plan for investors.

If you flip properties, do you plan on buying more properties since they are cheaper?

If you're a rental investor, do you plan on buying more cash flowing properties at a discount?

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JD MartinBusiness Member

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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

If it crashes? I will probably be doing the same thing if it didn't crash. Playing some music, buying some RE, working my job, drink a little wine on Sunday with my macaroni 😃

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Manny Cirino
Real Estate Agent · Winter haven, FL · Member since 2011 · 572 posts · 336 votes
6y
Not if the market is in deed crashing make no mistake about it.
Best thing to do is sit back and watch patiently as things start to collapse. I already know several people around me in the medical field being laid off.
Study subject to, seller finance or wrap around strategies and most importantly, negotiating short sale. People made alot of money in the last recession investing in short sales and loss mitigation(loan modifications and short sales).
1 Reply
Greg Morris
Flipper/Rehabber · Spanish Fort, Ala · Member since 2019 · 97 posts · 88 votes
6y
The next crash will be an everything crash. God forbid but it's most likely coming. I think the best plan which some have mentioned is rentals. Everybody needs a place to live. I'm thinking you want middle class renters so when economy goes down the upper class will down size to the middle class rents and so on. Cash flow will give you the opportunity to pickup those good deals.
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Andres A.
Specialist · Atlanta · Member since 2019 · 88 posts · 53 votes
6y
Would you wait to buy rentals or buy now?
0 Reply
Dylan H.
Rental Property Investor · Savannah, GA · Member since 2018 · 174 posts · 129 votes
6y
@Jon S. Yes I'd be happy to elaborate!
Let's break it down: $150,000 Duplex, 20% down ($30000), 30 Year Fixed Rate mortgage at 4.5% = Mortgage payment of $608/month, Each side rents for $775 = $1550/month in rent, 50% Rule for expenses ($775)
These assumptions result in a monthly cashflow of $167, we'll round down to $150/month to keep the numbers round. $1800/year in cashflow = 6% COC return of your $30,000 down payment.
Now, some important and EXTREMELY conservative assumptions. 0% appreciation of your property and your investment account is a Roth so you will not pay taxes when you take out the money.
In 30 years you will own the duplex free and clear, have earned $54,000 in cashflow that you most likely didn't pay taxes on if you have a good accountant. So, that's $204,000 earned over the 30 years. Your $30,000 investment compounded at an 8% rate and is now worth ~$302,000. So, the stock market would win. The S&P500 compounded at roughly 7.85% over the last 30 years, if you assume growth will continue at the same rate it did over the last 30 years, then chose the stock market. If you assume virtually any appreciation in housing values, then the real estate investment wins (historically 4% appreciation for home values in the US).
The point I'm trying to make is that if absolutely everything goes right for the stock market and everything goes wrong for the housing market then stocks would win.(That's not how it works, everything is tied together, it's literally impossible) If trends continue to be the same, real estate would win. There's lots of important assumptions to take into consideration for both sides, and when you apply conservative and modest assumptions to real estate it crushes the market.
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Virginia Damato
Rental Property Investor · NJ · Member since 2019 · 30 posts · 16 votes
6y
@James Wise
I dont anticipate a 2008 crash. The market hasn't appreciated at the rate of 2003-2006.
I do anticipate a correction at some point. It's just the natural cycle.
People always need a place to live. So if your properties are sound you just just ride it out.
Upside..when the market ranks a little good deals are more prevalent.
Stay the course.
1 Reply
Rob Drum
Real Estate Broker · Bradenton, FL · Member since 2017 · 544 posts · 363 votes
6y
@Timothy Hero
I’m always a buyer on rental properties.
The next crash is when I’ll buy my beach house 😎
3 Reply
Mark H. Porter
Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
6y
I'm buying STR's in beach areas. Right now the wealthy are going to Europe and the Caribbean for vacation. "You know what" hits the fan and they'll just decide to stay stateside. 2008 was a beast in areas of vacation-area speculation - studios that people paid $185,000 for after seeing them at $100K the year before then were at $50K in 2009. It also took a LONG time to recover to the point where buying was attractive, about 7 years.
This is why you need to buy right - low price, low rate, and perhaps sellers money back at closing for repairs/rehab.
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Josh V.
Excelsior, MN · Member since 2016 · 52 posts · 27 votes
6y
Stay the course and stick to my numbers, which are conservative anyway. Don't over leverage even with the low rate environment we are in. I don't try to time anything but invest like we are always in or heading into a recession. Keeps your head above water when you are actually in one.
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Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Timothy Hero Buy buy buy, cash is king. Everyone should always have cash on hand for when things go bad,, .
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Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
6y
Same thing I'm doing now. Buying long term rentals.
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Timothy Hero
OP
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
Originally posted by @Bob Prisco:
@Timothy Hero Buy buy buy, cash is king. Everyone should always have cash on hand for when things go bad,, .

Since rates range during a down market, cash definitely holds more value. But if you can find a lender that has decent rates during a down market, it might be worth taking advantage of the leverage.
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Timothy Hero
OP
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
Originally posted by @Jordan Moorhead:
Same thing I'm doing now. Buying long term rentals.

Even more during a bad market I assume. It's all discounted :)
1 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Timothy Hero I never use a loan, ( well 90% of the time ) cash is king. You get the best deals closing " as is " in a couple days vs loans, inspections appraisals, etc, and two months or so. Refi cash out, buy more.
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Rodney Miller
Lender · Oklahoma City, OK · Member since 2017 · 138 posts · 130 votes
6y
@Joe Splitrock I held about 75 rental houses in 2008 during the downturn. Vacancy really wasn't affected and rents began to climb shortly thereafter. Maybe it was my market (OKC). My properties are bread and butter class C housing for the blue-collar Tennant. I think Class C housing fairs much better during downturns. I think the smart money is investing in Class C housing and Multifamily as well as mobile home parks. The Investors that got into trouble were highly overleveraged and were thin on cashflow. Class C properties, if purchased right cash flow great and stay full during tough times (at least in my market). After living through the 2008 downturn I am now focused exclusively on Class C multifamily and mobile home parks.
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Account Closed
Attorney · Bedford, NY · Member since 2020 · 15 posts · 24 votes
6y
@Timothy Hero interest rates go down in a crash. Best time to use bank financing is during a downturn because money is cheap. With all due respect to other posters, it’s actually probably a bit foolish to use cash when interest rates are low. If you have 800k in cash, you ca probably buy 3 homes using bank financing. If you use all cash, you get 1 home. As for being able to offer “all cash”, tell the buyer you are all cash anyway. Get ALL documentation to your bank before you find a property. I’m not talking just ore approval, I’m talking ALL documents required to actually get the loan. This way, when you find a property, you can close as quickly as 15 days.
1 Reply
Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Account Closed in the cleveland markets cash is king, Close in a couple days, AS IS. Also for 800k I can buy 20 ish props :) Refi , cash out, then do again. Try getting a good deal in a competitive market like cleveland with a loan, not going to happen. This is not speculation on my behalf . Also banks always delay closings.
Good Luck
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Account Closed
Attorney · Bedford, NY · Member since 2020 · 15 posts · 24 votes
6y
@Bob Prisco I hear that. I’m in New York. 800 gets you a decent 2 family if you are lucky. I have a strong relationship with my bank that allows me to close fast. I do all cash on some deals, but generally I’m using financing. If I need to close very quick, I’ll lay the cash out myself and then finance it after the close. But it seems silly to me to use cash when you can use leverage to grow faster. That said, in a market where homes cost under 100k, I suppose it makes sense to use cash. In a down turn, I’m buying more multis and apartment complexes. And I’m going to foreclosure auctions every Monday. I would also start buying up more flex space which will be heavily discounted in the short term but immensely valuable in the long run. currently own 90,000 square feet of flex in the NYC area and it has been my best investment. If the economy tanks, I’m buying warehouses.
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Jaspreet Baveja
Lender · Palo Alto, CA · Member since 2017 · 142 posts · 91 votes
6y
Originally posted by @Dan H.:
Buy, buy, buy, and buy some more.
If you believe a downturn is likely, you should have a lot of assets liquid. The problem with liquid assets is the return is almost always lower than less liquid options.

If you can find an alternative, a medium ground, let's say 3 to 6 months terms on Private Notes, then you're not fully liquid, but that short term / duration elevates your chances of having liquidity fairly quickly if needed. Worst case, you're taking back assets you wanted anyways, and best case, you've got your cash back with some generous returns ready to go buy the assets you so desire now... That's what my current strategy is.
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Bob Prisco
Specialist · Cleveland, OH · Member since 2018 · 1k+ posts · 666 votes
6y
@Account Closed I am from LI, so I understand pricing.. I have been doing business in the cleveland markets for about 10 years,,,, crazy returns
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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
Originally posted by @Jaspreet Baveja:
Originally posted by @Dan H.:
Buy, buy, buy, and buy some more.
If you believe a downturn is likely, you should have a lot of assets liquid. The problem with liquid assets is the return is almost always lower than less liquid options.

If you can find an alternative, a medium ground, let's say 3 to 6 months terms on Private Notes, then you're not fully liquid, but that short term / duration elevates your chances of having liquidity fairly quickly if needed. Worst case, you're taking back assets you wanted anyways, and best case, you've got your cash back with some generous returns ready to go buy the assets you so desire now... That's what my current strategy is.

Here is the worst case in a large downturn. The notes become non-performing and decline in value. They may be backed by a first deed, but the RE values have fallen so the RE value may not be enough to cover the principle. Ideally in 4 to 6 months, the decline is not going to be too severe but that is not guaranteed.
I am not implying your strategy is bad but in worse case scenarios even fundamentally sound strategies may have issues.
BTW a similar approach is to have high grade bonds via a large broker that allows low interest borrowing against the bonds. When you do not need the money, the bonds are doing their work accumulating return. When you need money, borrow against the bonds at a low interest, no/minimal costs. It has a similar worse case. If entities are defaulting on high grade bonds... Seems it would have to be a very bad downturn.
Good luck
1 Reply
Melanie McDaniel
Investor · Austin, TX · Member since 2017 · 274 posts · 117 votes
6y
For those of you who were at BEC20, you would have heard from experts like Neal Bawa and Jillian Helman, Jamie Smith, and John Sebree. They had some pretty strong opinions on this topic. For the base-hit, value-add C and B multifamily in excellent markets, keep buying with conservative underwriting. Consider keeping some "dry powder" so you can buy in the dip. Kathy Fettke added, "Sell overvalued, underperforming properties and exchange for undervalued, high performing assets." The key here is conservative underwriting and make sure it cash flows at purchase.
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Timothy Hero
OP
Lender · United States · Member since 2020 · 1k+ posts · 499 votes
6y
I believe a market plays a huge part on if it's smart to go all cash or financing. Not to mention, it also depends on how bad the "crash" is.
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Oscar Montealegre
Member since 2017 · 29 posts · 67 votes
6y
Great question Timothy. I'm making sure to have some dry powder on the side so when there is a correction to jump on the property discounts that I hope will be available. However I do not think we are going to see anything similar to 2008.
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Nancy P.
Naperville, IL · Member since 2018 · 330 posts · 357 votes
6y
Originally posted by @Joe Splitrock:
It is a major stretch to believe an exact repeat of 2008 would happen. The factors that lead to that are not in place today. If we did see a repeat, then financing would dry up, so you should have cash today.
The risk with coronavirus is way greater than what happened in 2008. They are seeing 2% mortality rate and projecting half the worlds population or more could eventually get the virus. When it hits critical mass in the US, it could shut down businesses and schools for a month or more. It would shut down retail, restaurants, car dealerships, airlines... When spending stops, businesses go into cost cutting mode and layoffs are the easiest way to cut costs. Massive layoffs combined with population loss, could be a problem for everyone.
On top of a global pandemic, it appears we will have a polarizing presidential election and a change in leadership would be a seismic shift in business policy. The effect on the stock market, businesses and housing would be profound.
Let's all hope for the best but if multiple events hit at the same time, it could cause a downward spiral.
The World Health Organization said on Monday that the fatality rate in Wuhan, China, considered the epicenter of the outbreak, is between 2% and 4%. Outside of Wuhan, it is thought to be closer to 0.7%. (And varies WILDLY by age and current health conditions. If this **** really gets out of control, we're mostly going to lose older and sicker folks...interesting to ponder the long term effects.)

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Jai Reddy
Edmond, OK · Member since 2012 · 456 posts · 270 votes
6y
@Melanie McDaniel
I am trying to imagine who would buy the overvalued and underperforming property I want to sell.
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